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Stability, popularity poles apart when power bills soar

Stability, popularity poles apart when power bills soar

Michael West
Published: June 16, 2012 – 3:00AM

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AT ANY other point in history, a government presiding over economic growth at 4.2 per cent, a jobless rate at 5.2 per cent and inflation in the vicinity of 2 per cent would have been sitting pretty, even been lauded for its prowess.

Especially if the rest of the world was in far worse shape than us, as is the case.

Somehow, though, they have managed to make a meal of this exquisite set of numbers. Grumpiness is high. It is a miracle of unpopularity.

And governments, state and federal, may find popularity increasingly hard to come by in the next couple of years as rising power prices really start to bite.

”Bill shock” is a looming nightmare for low-income households. Electricity is a basic commodity. And rises of 15 per cent and more each year in a basic commodity are not merely a menace to the welfare of the household, but a threat to small business and economic growth, full stop.

It is no small irony that although the cost of electricity is rapidly rising, demand is falling. Economics 101 would suggest prices should fall when demand falls.

But when it comes to the supply of power there is a flaw in the regulatory framework that leads to a ”gold plating” of the grid, the poles and wires that make up the network.

In New South Wales, for instance, where consumers will be hit hardest, network upgrades will constitute 60 per cent of the total rise in electricity costs. The carbon tax is often painted as the villain in the piece, and that will hurt too, but network upgrades are the big offender.

Wholesale prices, meanwhile, are the same as they were 12 years ago.

The ”gold plating” arises because the network providers make a margin on the size of their asset base. The more they spend on their assets, the higher is the dividend they pay to government each year.

And they are proposing to spend big, Transgrid – owner, operator and manager of the transmission system for NSW’s high-voltage electricity – expects to expand its asset base by 24 per cent at a cost of $2.6 billion over the next five years.

There is nothing official yet, but it is reasonable to surmise that the NSW government may face a conflict of interests here.

In Victoria, the network was privatised under the Kennett government. In NSW, Barry O’Farrell’s brains trust must at least be contemplating further privatisation. They could do with the money.

And Transgrid must be high on the list of things to sell. It would also be a lot easier to sell with a prospectus that included rising revenue forecasts.

Demand for electricity has been falling since 2008 in Victoria, NSW and Queensland at roughly 1 per cent a year. That is in spite of forecast rises of 2.2 per cent a year. Demand is now 10 per cent below where the industry forecast it would be four years ago.

Mild weather, changing consumer behaviour and rising input costs have all been factors. The billions earmarked to upgrade the grid for the National Electricity Market have been based, erroneously, on assumptions of rising demand.

Now, even the utilities, Origin Energy, TRUenergy and AGL, argue there is no need for new baseload power before 2020, but the big capex plans remain afoot nevertheless.

Independent pricing regulator IPART and the Australian Energy Regulator have both expressed concern about the network costs. As yet to no avail.

And while the NSW government ignores the issue, we have the bizarre spectre of Canberra compensating the biggest polluters as part of its carbon tax package.

Incidentally, the question remains: if the Coalition wins office and cans the carbon tax, do the beneficiaries of the Gillard government’s compo package – mostly foreign multinationals – have to pay back that $1 billion cash gift?